Japanese equities veteran Andrew Rose says there are still reasonably strong gains to be made in the country's stock market despite the sharp rises of the past year.
The Citywire AA-rated Schroder Tokyo fund manager does however believe the initial measures of prime minister Abe's 'third arrow' - structural reform - have so far proved disappointing.
Rose said: 'Markets have run strongly over the past 12 months and what could have gone right has gone right, but there is still cause for optimism.'
'The first two arrows have been fired successfully but the third, growth strategy, lies ahead. No one is going to argue about printing money and spending more money, but structural reforms is a much tougher ask, and so far the third arrow measures have proved disappointing.'
Rose says that Abenomics optimists had been hoping for more concrete measures to deal with an inflexible labour market and pension reforms, but so far efforts in these areas had been muted.
He also points out that what many believed would be a smooth path towards joining the Trans- Pacific Partnership (TPP) has hit a stumbling block after the latest round of talks in Singapore.
Ultimately however he expects Japan to join its Pacific Rim partners in the TPP although that process may now have been pushed out by a further year or two.
Rose said the recent resilience of the stock market had been closely correlated with the weakening yen.
'The market has gone up as the currency has weakened, mainly on the back of expectations of tapering in the US.'
However, with the yen trading at around 1.03 to the US dollar, Rose does not expect it to weaken much further from here, despite concerns in some quarters that next April's consumption tax hike will cause it to fall further.
With Japan currently having to import all of its energy requirements after the shutdown of the nuclear programme following the Fukushima disaster, Rose says if the yen weakened further, it would put extra strain on the domestic economy.
'It is all very well for exporters having a weaker yen but if the demand for products is weak it won't help that much. Even if it does weaken further I think the positive benefits of that will be much less from here.'
Rose predicts that pressure from the rising cost of importing fuel will eventually lead to the country starting to switch some of its newer nuclear reactors back on.
'Nuclear power contributed 30% of Japan's total energy output before Fukushima and my expectation is that eventually half of that capacity will come back on stream. That process will start soon, but it could take a number of years.'
Rose thinks Japanese equities are still 'not expensive' after rallying from a low base and he tips domestic demand for risk assets to sustain market returns over the medium term.
'In terms of corporates, the profit picture remains strong and I expect domestic investors to be more constructive going forward.
Rose's optimism is based around the recent creation of a Japanese individual savings account, the NISA, which will see investors invest up to 1 million yen, or $10,000 annually into stocks and shares.
'Personal investors still have 55% of their assets in bank deposits and just 10% in equities. This has been the right call over the last 15 years due to deflation, but if people start to believe that Abenomics will be successful and 2% inflation can be achieved, they will start to make the asset allocation move into risk assets.'
Over the three years to the end of November, Rose has returned 65.1% versus the average Equity - Japan manager return of 57.1%.